Pondering the Summers of 2012 and 2014

The gulf between inflating global securities prices and deteriorating fundamental
prospects widens by the week.

Another captivating week capped off a dramatic summer. War erupts in Europe.
In the Middle East, a terrorist organization with unprecedented military might
blows through Iraqi defenses to take control of a large swath of Iraq to go
along with its considerable territory in Syria (establishing an "Islamic caliphate").

Meanwhile, global securities markets enjoyed rallies that were equally dramatic.
Enjoying a summer surge, U.S. equities disregarded geopolitics to post all-time
highs (S&P 2000!). Curiously, Treasury yields were in no way excluded from
the frenzy. In the face of rallying stocks and generally positive U.S. economic
data, Treasury yields surprised with a determined move to the downside. This
latest "conundrum" saw 10-year yields sink to 2.34%, a 15-month low. While
notably volatile, corporate Credit spreads ended August about where they began
June.

Interestingly, European debt markets once again became a focal point - somewhat
a mirror image of the drama-filled Summer of 2012. German 10-year bund yields
sank this week to a record-low 0.89%, with French yields at an all-time low
1.25%. Incredibly, German sovereign yields turned negative all the way out
to four year maturities. More amazing yet, yields across the spectrum of Europe's
basket-case periphery collapsed to at or near historic lows.

Spain's 10-year yields traded to record low yields, ending August at 2.23%,
down 62 bps in three months and a stunning 524 bps below July 2012 highs. Despite
national public debt surpassing 130% of GDP (and rising!), Italian 10-year
yields (briefly) traded below Treasuries before ending the month at 2.44%.
Italian yields were down about 50bps in three months (down 470bps from 2012
highs). Portuguese yields dropped another 30bps this summer to 3.22%, increasing
2014's y-t-d yield decline to almost 300 bps. Simply astounding.

The global backdrop is absolutely fascinating, if not comforting. From an
analytical perspective, the divergence between the troubling global fundamental
backdrop and surging securities prices comes chock full of intrigue. An exuberant
marketplace, especially in the U.S., perceives a virtually best-case scenario:
an economic recovery having attained important momentum, with market yields
pushed lower by global factors. The Jackson Hole central bank powwow, with
a dovish Janet Yellen and hints of impending QE from the Draghi ECB, placed
a bold exclamation point on the already emboldened bullish view.

This week I found myself reflecting back to that fateful summer of 2012 -
a critical juncture for global policymaking and markets that forever changed
the world. Back then Europe was the weakest link in a fragile post-crisis global
financial and economic recovery. I remain convinced the world was at the brink
of what would have been a crisis more problematic than 2008/09.

Europe was facing a systemic crisis of confidence. With the periphery countries
succumbing one-by-one to financial crisis, the euro currency was facing an
existential threat. In particular, the marketplace was rapidly losing confidence
in a heavily indebted Italy. It was simply too big to bail out. Italy along
with the periphery began to suffer destabilizing financial outflows. And a
crisis engulfing the Italian banks was poised to spark a crisis of confidence
throughout the entire vulnerable European banking system. A crisis of confidence
in Europe would have spread globally through various channels, certainly via
the leveraged speculating community and emerging markets (EM) that were both
heavily dependent upon European bank finance.

Why would the Summer of 2012 occupy my mind? Well, in last week's CBB I focused
on how the Fed's open-ended QE program fundamentally altered market perceptions,
certainly including market faith that the Fed and global central bankers will
ensure ongoing liquid securities markets. And this perception - the "Moneyness
of Risk Assets" - has been fundamental to what I believe has evolved into speculative "blow-offs" in
historic multi-decade Credit and securities Bubbles.

If not for a potentially dire European crisis, I don't believe Bernanke would
have so aggressively moved forward with "QE infinity." It was never really
about jobs; that was merely a feint. The whole focus on the unemployment rate,
employment dynamics and such has been a ruse. As far as I'm concerned, the
current employment-fixation underpinning chair Yellen's policy doctrine is
a ploy. Jackson Hole 2014 - "Re-Evaluating Labor Market Dynamics" - was little
more than policymaking subterfuge.

Importantly, the Summer of 2012 saw international monetary policy come under
the seemingly complete control of a quite small group of central bankers (see
Hilsenrath's "Inside the Risky Bets of Central Banks," WSJ, December 11, 2012).
Recall that shortly after Draghi declared "The ECB is ready to do whatever
it takes... And believe me, it will be enough," both the Bernanke Fed and Kuroda
Bank of Japan (BOJ) commenced discussions to implement "open-ended" QE. The
nucleus of the global central bank community all quickly fell in line. This
has profoundly impacted market perceptions, hence global securities markets
dynamics and prices. The notion of a small cadre of central bankers dictating
global monetary policy - irrespective of the views of various central bank
committees - plays prominently in current market exuberance that only the views
of uber-doves Yellen, Draghi and Kuroda really matter. Geopolitical strife,
even war, along with global financial and economic fragility, even deflation,
would undoubtedly be met with more open-ended monetary stimulus (and higher
securities prices!).

It would be dangerous if global market Bubbles were inflating in the face
of deteriorating fundamentals. If a deteriorating backdrop was specifically
intensifying Bubble excesses, then I would argue strongly that such dynamics
were fomenting catastrophe. Indeed, I see the recent rapidly widening gulf
between inflating Bubbles and fundamental deterioration as creating the most
precarious global backdrop in decades (going back to the late-twenties). And
the situation now turns more alarming by the week.

Global markets were pleased with Yellen's Jackson Hole dovishness. Market
participants were tickled to hear BOJ's Kuroda talk of extending aggressive
monetary stimulus for "some time" to ensure the defeat deflation. Yet the markets
were downright giddy when the ECB's Draghi noted heightened deflation risks
while hinting at QE measures. Why such keen interest? Because Europe is once
again the weak link in an increasingly fragile global system. And clearly,
as bullish thinking goes, heightened European risks ensure that global central
bankers will keep the monetary spigots running wide open. Buy stocks, bonds
and risk assets.

So, from the standpoint of my analytical framework, I am confident in the
global securities markets Bubble thesis. According to Bloomberg, the value
of global equities this week rose to a record $66 TN. The S&P500 has now
rallied 57% off of June 2012 lows. Over this period, the Nasdaq 100 (NDX) has
gained 67%, the MidCaps 63%, the Semiconductors (SOX) 87% and the Biotechs
(BTK) 131%. In Europe, European equities (Euro Stoxx index) have rallied 55%
from 2012 lows, led by gains of 81% in Spain and 67% in Italy.

No doubt whatsoever that two years of unprecedented monetary stimulus have
had a profound effect on global securities prices (and asset prices more generally).
How about on global fundamentals? While the bulls would disagree, I believe
the global economy is only more vulnerable these days. The Chinese economy
is clearly weaker - arguably acutely vulnerable - than two years ago. Growth
generally throughout EM is weaker (i.e. Brazil Q2 '14 growth negative 0.6%
vs. positive growth throughout 2012).

How about Europe, the catalyst for two years of reckless global monetary stimulus?
Well, the prognosis is not good. A temporary stimulus-induced uptick in growth
has of late given way to stagnation. At about 12.5%, Eurozone unemployment
is essentially unchanged from 2012. And in the face of global liquidity abundance
(and resulting booming securities markets), consumer price inflation has weakened.
European "CPI" has declined from about 2.5% in 2012 to the recent annual rate
of 0.3%. With "core" French and German economies slowing - and geopolitical
risks rapidly escalating - European economic prospects are nothing short of
abysmal.

I believed in 2012 that the euro currency regime was unsustainable - and I
have seen little to alter this view. If anything, the past two years have provided
additional confirmation that the experiment in European economic, financial
and currency integration was a historic mistake. Today's forces of disenchantment,
acrimony and disintegration are too powerful. Public angst has become more
engrained. Anti-euro/EU sentiment has only gained momentum, with troubling
social and political ramifications. And I believe this unsettled and divisive
backdrop has contributed greatly to Putin's Ukraine gambit.

Yet all of this is viewed as "bullish". Clearly, the economic, financial,
social and military risks are so high on the European continent that Mr. Draghi
will have no alternative than to pursue Federal Reserve style QE. This, apparently,
will ensure another shot of monetary fuel to further inflate global securities
Bubbles. And a weak euro will provide another reliably weak currency for speculative "carry
trade" riches. Moreover, Draghi's compatriots at the Fed, BOJ, Bank of England,
Swiss National Bank and elsewhere will surely lend support both to help Europe
and to fight the "scourge of deflation."

Bloomberg's Caroline Connan: "The ECB president Mario Draghi is calling
for more help from governments in terms of fiscal policy. What could Germany
do to help France?"

Germany Finance Minister Wolfgang Schaeuble: "What Mario Draghi is saying
again and again is that what is needed are structural reforms. That is not
to the ECB to implement, because monetary policy can't. It's up to national
governments and parliaments. In this regard we agree, 100%: monetary policy
has to take its responsibility. But monetary policy can only buy time. To
solve the underlying problems is a matter of fiscal policy and especially
of economic policies - structural reforms. It's a globalized economy. We
have to work for - ongoing, again and again - to enhance competitiveness.
Because markets are changing very fast. And if you look at what's going on
with the global economy, it's very important that we all know in Europe -
every member state - that we have to stick on structural reforms again and
again to enhance competitiveness. If we will be complacent, even in Germany,
we are fine actually but if we would not continue to enhance our competitiveness
in coming years, we would lose our position."

Connan: "...One more comment on the Eurozone. We are going to get the latest
inflation numbers..., it's going to be much below the 2% target. Should the
ECB do more to fight deflation?"

Schaeuble: "I don't think that the ECB's monetary policy has the instruments
to fight deflation, to be very frank. Interest-rates are on a historical
level low. You can't solve the problem in lowering interest rates. The liquidity
in markets is not too low; it's even too high. Therefore we have the problems.
I think monetary policy has come to the end of its instruments. Therefore,
what we urgently need is investment, regaining confidence - by investors,
by markets, by consumers. In Germany, of course our economy faces geopolitical
risks in the given situation... But our growth is driven by internal demand,
because we have high confidence of consumers - investors as well. And the
main reason we have such high confidence, I think, is our public finance
is sustainable, we will stick to what we have promised; and we will continue
to stick on investments... And of course we have to raise our expenditure
for research and development. That is what the French government is also
deciding to do. I think this is the right direction."

I'd been awaiting a German response to all the Draghi QE jubilation. It is
notable that it came from Finance Minister Schaeuble and not Bundesbank President
Weidmann. Expectations for aggressive ECB monetary inflation do come at the
same time as the anti-German "austerity" movement becomes increasingly clamorous.
At the end of the day, I still don't see how the French, Italians and Germans
(among others) share a common currency. The cultures - the views on so many
things, including how wealth is created (and shared), how economies should
function, and how monetary and fiscal affairs must be managed - are inconsistent
and often conflicting. At some point, somebody - the "periphery" countries,
the French and Italians, or perhaps the German people - will say "enough is
enough - this is not sustainable."

In this age of monetary inflationism, the Germans provide a veritable oasis
of sanity. At its best, "monetary policy can only buy time." At its worst -
the current reality - over time it buys problematic out-of-control Bubbles.
Why would European banks partake in higher risk lending for business investment
when they can make seemingly risk-free profits buying sovereign bonds? For
that matter, why would American CEOs invest in plant and equipment at home
when so much "wealth" is created buying back their stock? Meanwhile, two years
of massive global monetary stimulus has prolonged historic investment booms
in China and throughout much of Asia. This has exacerbated Bubbles, while only
worsening the global pricing backdrop and capital investment environments elsewhere.
Global imbalances have worsened.

Monetary policy promised way too much back in 2012. As I've written repeatedly,
at this stage of a most spectacular and protracted Credit cycle, monetary inflation
can only make things worse. Where does it end? And not for a minute do I believe
the alarming rise in geopolitical risk and instability is unrelated to years
of prolonged global monetary disorder. Mismanagement of the world's reserve
currency is replete with huge consequences. Mismanagement of all the world's
major currencies is a complete fiasco.

Global central bank "international reserve assets" (excluding gold) - as tallied
by Bloomberg - were up $848bn y-o-y, or 7.6%, to $12.017 TN. Over two years,
reserves were $1.484 TN higher for 14% growth.

Money market fund assets gained $10.8bn to $2.595 TN. Money Fund assets were
down $124bn y-t-d and dropped $49bn from a year ago, or 1.9%.

Total Commercial Paper jumped $17bn to $1.040 TN. CP was down $6bn year-to-date,
while expanding $20bn from a year ago.

Currency Watch:

The U.S. dollar index added 0.5% to 82.748 (up 3.4% y-t-d). For the week on
the upside, the Brazilian real increased 1.9%, the Canadian dollar 0.6%, the
Mexican peso 0.4%, the South Korean won 0.4%, the Australian dollar 0.2%, the
South African rand 0.2%, the Taiwanese dollar 0.2% and the British pound 0.2%.
For the week on the downside, the Swedish krona declined 1.1%, the euro 0.8%,
the Danish krone 0.8%, the New Zealand dollar 0.6%, the Norwegian krone 0.5%,
the Swiss franc 0.5% and the Japanese yen 0.1%.

August 28 - Bloomberg (Nabila Ahmed and Katie Linsell): "The bond market is
about to roar back to life after the slowest August in six years. From grocer
Safeway Inc. to Australian mall owner Westfield Corp., companies are poised
to fuel debt sales in the U.S. next month that Bank of America Corp. said may
exceed $100 billion, keeping the market on pace for a third straight record
year. 'People are preparing to walk in on Sept. 2 with a pretty robust tone,'
said Huw Richards, the... co-head of investment grade finance at JPMorgan...,
the biggest underwriter of corporate bonds. Behind the anticipated rush to
raise debt is the biggest acquisition boom since the credit crisis, as well
as the opportunity to lock in near-record low yields while the rally that began
in 2009 endures."

August 28 - Bloomberg (Saleha Mohsin): "The head of debt investment at Norway's
$880 billion sovereign wealth fund, the world's largest, said a rally in U.S.
corporate bonds may be coming to an end. Looking at 'American corporate investment
grade bonds, we see that the spread lies around 100 bps, that is nearly just
as low as they were before the financial crisis,' Ole Christian Froeseth, head
of fixed-income at the oil fund, said... 'One can argue that there isn't much
juice left in this spread, especially not in relation to where we were during
the financial crisis.'"

U.S. Bubble Watch:

August 25 - Bloomberg (Lu Wang): "The Standard & Poor's 500 Index jumped
above 2,000 for the first time ever, building on a rally with a velocity approaching
the strongest stretch of the 1990s dot-com bubble. Investors who owned the
index when the advance began on March 9, 2009, are sitting on price appreciation
of 195.5%, or 24.5% a year on average... That compares with a gain of 236%,
or 27.1% annually, over an equal amount of days ending on March 24, 2000. Similarities
to the technology-fueled gains of two decades ago are multiplying with the
bull market approaching three years without a decline of 10% or more."

August 26 - Wall Street Journal (James R. Hagerty, John W. Miller and Bob
Tita): "America's shale boom has raised hopes of a revival in U.S. manufacturing,
in part fueled by cheaper energy. But U.S. factories still are losing ground
to rivals in Asia and Europe. Much of the problem stems from steel, trucks,
car parts, industrial machinery and furniture. The U.S. deficit on trade in
goods swelled in the first half to $371.59 billion from $354.64 a year earlier.
Imports rose 3.3%, while exports increased 2.6%. Manufactured exports, excluding
petroleum and coal, rose just 0.8%... Without a strong, sustainable increase
in exports, U.S. factories are unlikely to have the kind of resurgence forecast
by some pundits. But achieving that growth is difficult as China and other
countries have pursued aggressive export strategies and the U.S. has lost manufacturing
skills and suppliers after shifting production overseas. China isn't the only
country winning the battle. U.S. trade gaps with the three largest members
of the euro zone -- Germany, France and Italy -- all increased in the first
half."

August 27 - Financial Times (Camilla Hall): "The chief executive of Wells
Fargo has warned that the biggest US mortgage provider will avoid providing
home loans to people with lower credit scores unless federal authorities reduce
the threat that the banks will bear the costs for soured loans. John Stumpf
said government-backed agencies that buy mortgages, such as Fannie Mae, Freddie
Mac and the Federal Housing Administration, were too quick to accuse banks
of faulty underwriting on mortgages that default and force them to repurchase
the soured loans, known as 'put-back' risk. 'If you guys want to stick with
this programme of 'putting back' any time, any way, whatever, that's fine,
we're just not going to make those loans and there's going to be a whole bunch
of Americans that are underserved in the mortgage market,' Mr Stumpf told the
Financial Times."

August 27 - Bloomberg (Kasia Klimasinska): "The U.S. budget deficit will narrow
less than forecast this year even as it falls to the lowest level since 2007
as a share of the economy... The projected shortfall will be $506 billion in
the 12 months ending Sept. 30, compared with an April prediction for $492 billion
and a $680 billion gap posted last year, the nonpartisan CBO said... In 2015
it's projected to shrink for a sixth straight year, to $469 billion, capping
the longest stretch of fiscal improvement since 2000, near the end of an era
of surpluses."

August 28 - Bloomberg (Prashant Gopal): "Julian and Danielle Katz budgeted
$1.5 million to buy a home in their popular Brooklyn, New York, neighborhood
of Fort Greene. The only places they could afford were smaller than where they
already lived. The couple, who have three young daughters, instead bought a
brick townhouse in nearby Crown Heights. They paid almost $1.2 million and
are spending another $300,000 to renovate the previously vacant three-story
home that's a short walk to hipster hangouts cropping up on Franklin Avenue
and a newly opened beer hall partly funded by Goldman Sachs Group Inc. 'We
were priced out of a lot of Brooklyn neighborhoods,' said Julian Katz, a 41-year-old
advertising producer... 'We loved Fort Greene but we could only afford a modest
apartment there. We could get a whole house in Crown Heights.' A surge in Brooklyn
home values is fueling rapid gentrification in Crown Heights, where apartment
prices are up more than 50% from a year ago..."

August 29 - Bloomberg (Oshrat Carmiel): "Prices for previously owned Manhattan
condominiums rose to a record last month even as an increase in the supply
of units eased competition among buyers. An index of resale prices climbed
1.1% from June to reach the highest level in data going back to 1995, StreetEasy.com...
said..."

Europe Watch:

August 29 - Bloomberg (Jeff Black and Ian Wishart): "Mario Draghi has made
European political leaders an offer: You scratch my back and I'll scratch yours.
In turning up the rhetoric on his readiness to start quantitative easing, the
European Central Bank president is also asking governments to open their own
wallets. His message to European leaders preparing to gather in Brussels for
a summit tomorrow is that it's high time they boost domestic demand by using
the 'flexibility' built into their budget pact."

August 29 - Bloomberg (Ian Wishart): "Euro-area inflation slowed in August
and the region's unemployment rate remained close to a record, increasing pressure
on the European Central Bank to take action to kindle the bloc's faltering
recovery. Consumer prices rose 0.3% in August from a year earlier after a 0.4%
increase in July... That's the weakest rate since October 2009... Unemployment
remained at 11.5% in July..."

August 26 - Financial Times (Jeevan Vasagar): "German industry is predicting
a drop in exports to Russia of 20-25% over the course of this year, compounding
gloom over the health of Europe's biggest economy. A business lobby group representing
German companies trading in eastern Europe complained that 'significant uncertainties'
over embargo provisions were resulting in delays to deliveries of German machine
parts. German exports to Russia fell by 15.5% year on year in the first half,
while exports to Ukraine dropped by 32%."

August 26 - Reuters: "The time has come for France to resist Germany's 'obsession'
with austerity and promote alternative policies across the euro zone that support
household consumption, firebrand French Economy Minister Arnaud Montebourg
said... Deficit-reduction measures carried out since the 2008 financial crisis
have crippled Europe's economies and governments need to change course swiftly
or they will lose their voters to populist and extremist parties, Montebourg
told a socialists' meeting in eastern France. 'France is the euro zone's second-biggest
economy, the world's fifth-greatest power, and it does not intend to align
itself, ladies and gentlemen, with the excessive obsessions of Germany's conservatives,'
Montebourg said. 'That is why the time has come for France and its government,
in the name of the European Union's survival, to put up a just and sane resistance
[to these policies].' Montebourg said consensus was growing among economists
and politicians worldwide on the need for growth-oriented policies and mentioned
his German socialist counterpart Sigmar Gabriel and Italy's premier Matteo
Renzi as potential allies. He cited former president Charles de Gaulle and
former British prime minister Margaret Thatcher as having effectively spoken
up to change the course of EU policies they opposed."

August 25 - Bloomberg (Mark Deen and Helene Fouquet): "French President Francois
Hollande's firing of malcontent minister Arnaud Montebourg risks unleashing
the ruling Socialist Party's chief critic of budget cuts, adding to an austerity
backlash stirring across Europe. Montebourg, 51, industry minister for the
past two years, will not be part of the new team Hollande names tomorrow after
he publicly criticized the president for 'slavish' and 'dogmatic' deficit reduction
that he said stokes unemployment. The dismissal of a top minister underlines
the growing political crisis confronting Hollande as he seeks to balance European
Union pressure to reduce the deficit with domestic demands to revive a stalled
economy. It also exposes a wider rift in Europe as Italy uses its six-month
presidency of the 28-nation EU to make a stand against a German-led drive to
clamp down on spending. 'The backlash against austerity has taken some time
to arrive, but this is it,' Antonio Barroso, an analyst at Teneo Intelligence
in London, said... 'Of course Montebourg has done this for his personal ambition,
but his timing is good: The mood on this is shifting at the European level.'
With an approval rating of just 17 percent and faced with record-high French
unemployment levels, Hollande's room for maneuver is shrinking as he slips
into the second half of his five-year mandate."

August 27 - Bloomberg (Jillian Ward): "French factory confidence fell to the
lowest in 13 months in August, adding to signs that the economy may struggle
to grow after a stagnant first half... A separate business-confidence index
also declined. The latest evidence of weakness in the French economy comes
as President Francois Hollande deals with a mutiny within his government over
austerity. The economy failed to expand in the past two quarters and a survey
last week showed manufacturing contracted for a fourth month in August. 'Political
turmoil in France bodes ill for the struggling economy in the near term,' Jennifer
McKeown, an economist at Capital Economics..., said... 'Moreover, the rift
within the government will diminish the public's already limited faith in its
ability to get the economy back on track.'"

August 29 - Bloomberg (Alessandro Speciale and Lorenzo Totaro): "Italy's consumer
prices this month dropped the most since records began after the euro-area's
third-largest economy slipped into recession, adding to concerns that the region
might be headed toward deflation. The inflation rate... fell 0.2% in August
from a year earlier... Prices also fell 0.2% from July. Italy's economy contracted
for a second quarter in the three months through June sliding into its third
recession since 2008, Istat said... Data also showed unemployment at a record
high in the second quarter."

August 29 - Bloomberg (Giovanni Salzano): "Istat publishes... [Italian] seasonally
adjusted unemployment rate rose to 12.6% in July from 12.3% in June. Jobless
rate for 15-to 24-y/o fell to 42.9% in July from 43.7% in June..."

August 27 - Bloomberg (Jeff Black): "The European Central Bank's efforts to
restart the region's ailing securitization industry may fall short unless governments
step in and guarantee at least some of the debt, Executive Board member Benoit
Coeure said. 'Europe is facing a very fundamental choice if it wants to move
to an ABS market that is as deep and liquid as the U.S. market,' Coeure said...
'To reach this goal, the securitization market will require a significantly
different amount of public sponsoring than is currently the case.' ECB President
Mario Draghi said in June that the central bank was intensifying preparations
to purchase asset-backed securities in an effort to revitalize the $1.9 trillion
market that has contracted 34% since 2009. While the ECB has said it's ready
to use its own balance sheet, the European Union and national governments so
far have shown no willingness to help coax investors back to the asset class."

Global Bubble Watch:

August 27 - Bloomberg (Inyoung Hwang): "Rallies from Brazil to Japan and the
Standard & Poor's 500 Index's first trip above 2,000 sent the value of
global equities to a record $66 trillion. Shares worldwide added more than
$2.2 trillion in value since Aug. 7... Optimism that central banks will support
economic growth sent the MSCI All-Country World Index up 3.8% from its low
this month... Global markets are surmounting crises in Ukraine, the Gaza Strip
and Iraq as investors renew bets that stimulus will revive growth... 'Geopolitical
events are significant and major new attacks are tragic, but they're not enough
to unsettle the global economic forces in play, especially in America,' said
Patrick Spencer, head of U.S. equity sales at Robert W. Baird & Co... 'Draghi
gave clear indication that he's standing ready with further measures to stimulate
growth and that's helping overall sentiment.'"

August 27 - Bloomberg (Katherine Burton): "Neil Chriss is hitting his stride.
The math doctorate turned hedge-fund manager founded Hutchin Hill Capital LP
more than six years ago and built it to cater to large investors. After posting
annualized returns of 12%, about six times the average of his peers, he finds
himself in the sweet spot for fundraising... Chriss, 47, is one of the prime
beneficiaries as investors are on track to hand over the most cash to hedge
funds since 2007, driven by a search for steady returns and protection from
market declines... 'There are huge sums of money being put to work,' said Adam
Blitz, chief executive officer at Evanston Capital Management LLC... 'You are
getting some big checks coming into a fairly small universe of brand-name managers
who want to grow and are on the approved list of hedge-fund consultants.' Hedge
funds attracted a net $57 billion in the first half of this year, compared
with $63.7 billion for all of 2013, according to Hedge Fund Research Inc. Nine
firms, including Hutchin Hill, gathered almost a third of that amount... Industry
assets have swelled to a record $2.8 trillion even though funds, on average,
have posted 7% annualized returns since the financial crisis... Multistrategy
firms, which use a range of tactics to invest across asset classes, are the
most popular this year after collecting a net $29.5 billion, according to Hedge
Fund Research... 'Pension funds see multistrategy hedge funds as a one- size-fits-all
investment,' said Brad Balter, head of... Balter Capital Management LLC. 'It's
very difficult right now to identify attractive opportunities, so they are
letting the manager make the tactical decisions rather than wait for their
own investment committees to re-allocate capital.'"

August 26 - Bloomberg (Lyubov Pronina and Natasha Doff): "China's debt dynamics
'are very dangerous, the way it is going now is not sustainable,' Maarten-Jan
Bakkum, an emerging-market strategist at ING Groep NV, says... 'It is possible
that China has a big financial problem in the coming 12 months...' As long
as authorities keep focusing on other things and don't start deleveraging process,
'risks are increasing for the system.' Bakkum sees risk of more defaults: 'it
could start with some big real estate development companies or with steel companies
with overcapacity, local government finances... There are all these weak spots,
and they're all connected..."

EM Bubble Watch:

August 29 - Bloomberg (Matthew Malinowski and Peter Millard): "Brazil's economy
slipped into recession in the first half of the year, after contracting more
than expected in the second quarter. Gross domestic product shrank by 0.6%
in the April-June period from the previous three months, after contracting
a revised 0.2% in the first quarter... President Dilma Rousseff's efforts to
spark growth through tax cuts, billions of dollars in credit and higher social
spending have failed to gain traction, as estimates of expansion this year
continue to tumble. Less than two months before elections, the economy has
been stalled by falling consumer confidence and shrinking industrial output."

Geopolitical Watch:

August 29 - Financial Times: "Western governments have long wondered whether
President Vladimir Putin would order a Russian assault on eastern Ukraine.
That such an attack is under way is no longer in doubt. Mr Putin may be conducting
a creeping 'stealth' offensive against his neighbour rather than a conventional
invasion. But the Nato alliance estimates that there are at least 1,000 Russians
operating in Ukraine, using tanks, artillery and armoured personnel carriers.
This is a dangerous escalation of the crisis - and one that demands a response
from the west. Mr Putin's actions demonstrate that he has no intention whatsoever
of abandoning his ambition to dismember Ukraine. He wants to thwart any chance
of Kiev's new pro-western leadership taking the country into the Nato alliance.
To frustrate Ukraine's hopes of greater integration with the west, Russia's
leader is determined to foment a 'frozen conflict' in the east of country."

August 29 - Bloomberg (Robert Hutton and Ian Wishart): "The U.K. will press
European Union leaders to consider blocking Russian access to the SWIFT banking
transaction system under an expansion of sanctions over the conflict in Ukraine,
a British government official said. The Society for Worldwide Interbank Financial
Telecommunication, known as SWIFT, is one of Russia's main connections to the
international financial system. Prime Minister David Cameron's government plans
to put the topic on the agenda for a meeting of EU leaders in Brussels tomorrow...
'Blocking Russia from the SWIFT system would be a very serious escalation in
sanctions against Russia and would most certainly result in equally tough retaliatory
actions by Russia,' said Chris Weafer, a senior partner at Moscow-based consulting
firm Macro Advisory."

August 29 - Bloomberg (Robert Hutton): "Prime Minister David Cameron said
the threat to the U.K. from Islamic State militants is greater than anything
previously faced, as the government raised the terror threat level to 'Severe,'
the second-highest level, based on new intelligence... Speaking today in London,
Cameron said the battle against Islamic extremism is a 'generational struggle'
which will probably last decades. He said Islamic State, the Sunni militant
group also known as ISIL and ISIS that has captured ground in both Syria and
Iraq, had taken it to a new level. 'What we are facing in Iraq now with ISIL
is a greater threat to our security than we have seen before... We could be
facing a terrorist state on the shores of the Mediterranean and bordering a
NATO member."

August 25 - Xinhua: "Secretary General of the Organization for Security and
Co-operation in Europe (OSCE) Lamberto Zannier has warned of an 'aggressive
nationalism' in Europe brought about by confrontations and conflicts, local
media reported... In an interview with the Austria Press Agency Monday, Zannier
put particular emphasis on the current crisis between Russia and Ukraine, though
said an increase in nationalism is also visible in Western Europe, particularly
in the form of intolerance in multi-ethnic societies."

August 28 - Bloomberg (Hugh Son): "JPMorgan Chase & Co., the biggest U.S.
bank, said it increased defenses against computer hackers after an attack against
the industry this month. The lender is working with U.S. authorities to determine
the scope of the assault and is taking additional steps to safeguard confidential
information... JPMorgan will contact any customers that might have been affected,
Wexler said, adding that the firm hasn't seen unusual fraud levels. JPMorgan
was among at least five banks targeted in the coordinated attack on financial
institutions in recent weeks, a U.S. official said... The assault led to the
theft of customer data that could be used to drain accounts, according to another
person briefed by U.S. law enforcement."

August 25 - Bloomberg (Indira A.R. Lakshmanan): "With its reign of terror
over a large population and ability to self-finance on a staggering scale,
the extremist group that beheaded American journalist James Foley resembles
the Taliban with oil wells. The Islamic State, which now controls an area of
Iraq and Syria larger than the U.K., may be raising more than $2 million dollars
a day in revenue from oil sales, extortion, taxes and smuggling, according
to U.S. intelligence officials... Unlike other extremist groups' reliance on
foreign donations that can be squeezed by sanctions, diplomacy and law enforcement,
the Islamic State's predominantly local revenue stream poses a unique challenge
to governments seeking to halt its advance and undermine its ability to launch
terrorist attacks that in time might be aimed at the U.S. and Europe. 'The
Islamic State is probably the wealthiest terrorist group we've ever known,'
said Matthew Levitt, a former U.S. Treasury terrorism and financial intelligence
official... 'They're not as integrated with the international financial system,
and therefore not as vulnerable' to sanctions, anti-money laundering laws and
banking regulations."

August 28 - Bloomberg (Tarek El-Tablawy and Mariam Fam): "Egypt has won the
United Arab Emirates' support for a crackdown on Islamists and there are signs
the collaboration is extending beyond its borders. U.S. officials say the U.A.E.
and Egypt were behind air strikes in the Libyan capital in the past week. Egypt
has denied its forces were involved, while the U.A.E. said claims of its intervention
were an attempt to divert attention from political reversals suffered by Libya's
Islamists. The Arab revolts that broke out three years ago have morphed into
armed conflicts that mostly pit Islamists against more secular-minded forces.
The involvement by a Gulf Cooperation Council member in the Libya strikes,
if confirmed, would signal a transition from financier to active participant."

August 26 - Bloomberg (Jason Scott): "Australian lawmaker Clive Palmer issued
a written apology to China's ambassador for insulting the nation after calling
his Chinese business partners 'mongrels' who want to take over the country's
resources. The mining magnate-turned politician, who Prime Minister Tony Abbott
must negotiate with to pass legislation, told Chinese Ambassador Ma Zhaoxu
he regretted 'any hurt or anguish' his comments may have caused... The millionaire
is embroiled in a long-running legal dispute with Citic Pacific Ltd., which
has alleged he used funds from a joint account to help finance his political
campaign. Palmer also said on the program that the Chinese 'are communists,
they shoot their own people, they haven't got a justice system and they want
to take over this country.'"

China Bubble Watch:

August 28 - Bloomberg: "Rising stress in China's $6 trillion shadow banking
industry is testing central bank Governor Zhou Xiaochuan's resolve to limit
monetary easing as risks to the government's growth target climb. In the past
three months at least 10 trusts backed by assets spanning coal mines in Shanxi
to forests in Fujian have struggled to meet payments, sparking protests by
investors outside banks that distributed their products. A slump in new credit
in July underscored strains on the industry that funded as much as half of
China's recent growth, presenting Zhou with a choice: ease policy to avert
a slowdown, or hold the line. 'The central bank faces a dilemma,' said Ding
Shuang, senior China economist with Citigroup... 'On one hand, it's part of
the government and has to do what it can to aid growth; on the other, it knows
better than any other government agency the danger of rising debt. It's a tricky
balancing act.'"

August 26 - Financial Times: "China's tottering property market presents one
of the greatest threats to the global economy. Not only do the construction
and real estate industries account for a full 13% of Chinese gross domestic
product, they also form the backbone of the country's fixed asset investment,
the lodestar for commodity-exporting economies the world over. News of sagging
real estate market activity is, therefore, a concern in its own right. More
troubling, though, is that faith in Beijing's ability to prevent a slump from
descending into a crash is starting to unravel. The newsflow is bleak. Official
statistics for July showed 64 of 70 cities surveyed experiencing falling home
prices, the biggest monthly proportion of declines since records began in 2005.
Developers are pulling back from new investments, and floor space sold in July
tumbled 16.3% year on year, down sharply from June."

August 26 - Financial Times (Jamil Anderlini): "On desolate salt flats on
the far outskirts of China's sixth-largest city, dozens of enormous half-built
skyscrapers stand as a monument to the excess and optimism of the Chinese real
estate market. As physical manifestations of China's property bubble go, few
examples can beat this effort to replicate Wall Street in a wasteland 40km
outside Tianjin and 150km from the capital Beijing. Blueprints for the Yujiapu
Financial District are intentionally modelled on Manhattan's skyline, complete
with an ersatz Rockefeller Center and twin office towers that look uncannily
similar to the ones destroyed on September 11 2001. Officials in charge of
the project boast that when Yujiapu is eventually finished in 2019 it will
be one-third larger than the City of London and more than three times the size
of New York's financial district, at least in terms of surface area. But after
years of soaring prices and frantic construction across the entire country,
China's real estate bubble is showing serious signs of strain and this project's
fate is now in question. The country's property market is barely 15 years old
and nobody has ever experienced a real crash because, before the late 1990s,
most urban residents in post-Communist China were still provided housing by
their' 'work unit'."

August 27 - Financial Times (Gabriel Wildau): "In the latest sign of Chinese
developers' desperation to unload inventory into a weak property market, China
Vanke Co is offering discounts of up to $325,000 to homebuyers who shop on
Alibaba's Taobao, an e-commerce platform. The country's biggest developer will
give discounts that match shoppers' spending of up to Rmb2m ($325,000) on the
eBay-like service. Homes in real estate developments in Beijing, Shanghai,
Guangzhou and Chongqing, among other cities, will qualify... Developers began
cutting prices this year but have so far failed to revive flagging volumes.
More than 30 cities have also removed purchase restrictions introduced in 2010
to restrain price growth amid public anger over high prices."

August 29 - Bloomberg (Fion Li): "A probe into China's bond market and concern
over debt risks will combine to slow corporate issuance, according to a Moody's...
joint venture in the world's second-largest economy. The China Securities Regulatory
Commission and National Audit Office are reviewing whether consulting fees
paid by bond underwriters played a role in winning mandates, Caixin magazine
reported this month. Credit concerns are escalating as property prices fall,
state banks increase bad-loan provisions and at least 10 trusts struggle to
meet payments. 'This investigation focuses on the approval process, which could
become lengthier and likely reduce corporate issuance in the first quarter
of 2015,' Yu Lu... analyst at China Chengxin International Credit Rating Co.,
part-owned by Moody's, said... 'The authorities have raised the alarm on rising
corporate bond risks, given the negative headlines.'"

August 25 - Bloomberg (Ting Shi): "China may cut salaries of executives at
state-owned enterprises and financial institutions by as much as 70%, the most
drastic proposal yet in a planned overhaul of SOE management, according to
Caijing magazine. The upper limit for the annual salary of bosses at central
SOEs and banks would be set at 600,000 yuan ($97,532) under the change, Caijing
magazine reports, citing unidentified people with knowledge of a draft plan
by the Ministry of Human Resources and Social Security, the Ministry of Finance
and other related agencies. The South China Morning Post cited unidentified
officials last week as saying SOE executives would face pay cuts of as much
as 50% under the draft plan."

Japan Watch:

August 23 - Reuters: "The Bank of Japan may have to pursue its aggressive
monetary policy easing for 'some time' to fully vanquish deflation, BoJ Governor
Haruhiko Kuroda said... Speaking at a global central banking conference here,
Kuroda said the central bank's efforts to overcome deflation by stimulating
Japan's economy with large-scale asset purchases was proving effective. He
added, however, that the public was not yet convinced Japan's central bank
would hit its 2% inflation target. Creating that expectation was necessary
to get firms to raise wages - a key step in Japan's long war with deflation,
he said. 'We have committed ourselves to continuing the increasingly accommodative
stance until the 2% inflation target is met and maintained in a sustainable
manner,' Kuroda said. 'That means inflation expectations are anchored to 2%
... (and) that may take some more time.'"